Tiny enzymes are proving to be big business for Codexis (CDXS -1.84%). The biotech's shares gained 100% last year as Wall Street began paying closer attention to the company's potential. Armed with full-year 2018 operating results, investors can now confidently say they might be onto something.

The business met management's annual guidance on revenue and product gross margin, growing the top line 21% year-over-year. Codexis expects full-year 2019 revenue to grow about 16%, which might be enough to deliver positive operating income for the year. Despite expectations for double-digit growth, one of the company's segments is growing slower than investors expected. Management says not to worry, however.

A technician checking a stainless steel bioreactor.

Image source: Getty Images.

By the numbers

Codexis engineers complex biologic molecules called enzymes, which enable vital processes including cellular communication, energy generation, and the removal of wastes in all living things. That power extends to industrial manufacturing processes, too. The company supplies enzymes to pharmaceutical giant Merck, which uses them to produce active pharmaceutical ingredients more efficiently. The collaboration helped Merck increase the yield of its intended therapeutic agent, produce fewer waste products that are costly to dispose, and even forgo an expensive investment in a second facility.

After investing more than a decade into perfecting its enzyme engineering platform, Codexis appears to have finally found a sustainable way to leverage its expertise. It currently counts 21 of the top 25 pharma companies as customers, and it has a deal with Tate & Lyle spanning multiple food ingredients. It licenses its enzyme engineering software package to large customers for eight-figure sums, is starting market testing for new diagnostic tools this year, and even has a pharmaceutical pipeline of its own -- where the engineered enzyme is the drug.

All of those wins spurred the business last year, helping it meet management's full-year 2018 guidance with $60.6 million in total revenue and more than 50% product gross margin, which is impressive year-over-year growth: 




Year-over-Year Growth

Product revenue

$25.6 million

$26.7 million


Collaboration revenue

$35.0 million

$23.3 million


Total revenue

$60.6 million

$50.0 million


Product gross margin



10% (relative change)

Operating expenses

$71.9 million

$73.0 million


Operating income

($11.3 million)

($23.0 million)


Data source: Press release.

The small decline in product revenue in 2018 was to be expected due to shifts in product mix (more food ingredients, less pharma ingredients) and losing supply contracts from customer products that were simply discontinued. Investors witnessed the same phenomenon in 2017, and both times the business was able to replace nearly all its lost revenue. Growth should return shortly as the company expands its customer base.

A deeper dive into revenue sources suggests Codexis is on the right track. In addition to providing product revenue and collaboration revenue as specified by generally accepted accounting principles (GAAP), the business began reporting two operating segments in 2018: Performance enzymes and novel biotherapeutics. The former is the legacy enzyme supplying business and the latter tracks partnered clinical trials.

Last year Codexis generated $21.4 million in collaboration revenue from its performance enzymes segment, up from just $15.6 million in 2017. While that includes software licensing deals, it also suggests a healthy number of product-related projects are in development. That provides confidence product revenue growth can resume in the years ahead, assuming the projects result in commercialized products.

Meanwhile, the novel biotherapeutics segment reported revenue of $13.5 million in 2018, up from $7.7 million, demonstrating progress in the clinic. All of the segment's revenue is collaboration revenue from reaching development milestones. Codexis has received $21 million to date for its first clinical product, but could receive an additional $86 million in pre-commercial milestone payments, another $250 million in commercial milestone payments, and royalties on sales.

Looking ahead

Overall management expects another year of positive drivers for 2019. Revenue is expected to grow 16% year-over-year at the midpoint, while product gross margin is expected to be roughly identical to the level achieved last year.

However, investors might be disappointed if product revenue remains stubbornly resistant to growth for a third straight year. While non-pharma applications delivered an impressive growth rate of 39% in 2018, much of that replaced revenue lost from expired legacy contracts. Ideally, that trend will give way to segment growth, especially since product sales are the least risky source of revenue, and it will be key to delivering sustainably profitable operations.


Expectation for 2019

Year-over-Year Difference

Total revenue

$69 million to $72 million

14% to 19%

Product revenue

$26 million to $29 million

2% to 13%

Product gross margin

48% to 52%

Identical midpoint

Data source: Press release.

CEO John Nichols remained unfazed on the most recent conference call with investors. He said outside companies were begging Codexis to partner with them on molecular diagnostics, preferring the company's help to bringing it to market alone. That's encouraging for the company's product revenue potential.

Additionally, Nichols said the company's revenue base is the most diverse it's ever been, with eight separate pharmaceutical companies contributing at least $1 million in revenue in 2018. That diversification could justify the long wait for more robust product sales growth.

More importantly, if Codexis hits the midpoint of revenue guidance and maintains operating expenses (it expects operating expenses of roughly $72 million this year, nearly identical to last year), then its operations could near breaking even in 2019 on the basis of operating income. The business exited 2018 with $53 million in cash and cash equivalents, so it shouldn't need outside financing.

Check out the latest Codexis earnings call transcript.

A man staring at a chart illustrating profits.

Image source: Getty Images.

A growing business heading in the right direction

Investors have little to complain about in the company's fourth-quarter and full-year 2018 operating results. The business met management's guidance, diversified its customer base, and made swift progress in its first foray into the clinic.

Codexis provided encouraging guidance for 2019 and management soothed concerns over what appears to be slower than anticipated product revenue growth by offering new details. Simply put, this under-the-radar biotech is growing quickly and headed in the right direction. It could even be worth a small spot in your portfolio.